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The Supreme Court of Canada's decision in Lundin Mining Corp. v. Markowich offers much needed guidance on two recurring issues under Canadian securities laws:
- What constitutes a "material change"; and
- The standard for obtaining leave to bring a claim for secondary-market misrepresentation under Ontario's Securities Act.
While many capital market participants hoped that the decision in Lundin would result in more defined guidance as to what constitutes a "material change," only Justice Côté in dissent took that approach. The eight-judge majority held that the intent and purpose of the Securities Act (Ontario) (the "Act") was best served by maintaining a broad, context‑sensitive understanding of "material change."
The implications of the SCC's decision in Lundin are significant for Canadian issuers. The decision confirms that context will be the ultimate determinant of disclosure requirements, not a bright-line legal rule. Canadian issuers will be left to consider how a wide range of internal developments fall within that context-sensitive understanding of a "change." The decision is anticipated to have widespread application given the similar wording of the disclosure and leave provisions in securities legislation across Canada.
Background
Canadian securities laws require reporting issuers to forthwith (i.e. immediately) disclose a "material change" through a news release. The Act defines a "material change" as a change in the business, operations or capital of an issuer which would reasonably be expected to have a significant effect on the market price or value of its securities. This is distinct from a "material fact," which is any fact that would reasonably be expected to have a significant effect on the market price of an issuer's securities. Under the Act, "material facts" are required to be disclosed on a periodic basis.1
Canadian jurisprudence involving the interpretation of "material change" is limited. As a result, it is often challenging for issuers to determine when the threshold for disclosing a material change in its business, operations or capital has been met.
Facts in Lundin
The claim arose in connection with a rockslide at Lundin's Candelaria open‑pit copper mine in October 2017. In late October 2017, the company identified localized pit wall instability; days later, a rockslide occurred, temporarily restricting access to a part of the mine but causing no fatalities, injuries or damage to equipment. Lundin disclosed the rockslide a month later in a scheduled update, lowering its 2018 and 2019 production guidance by roughly 20% and announcing a resulting increase in expected cash costs for the mine along with some changes to the operating plan (the "Disclosure"). Subsequent to the Disclosure, Lundin's share price fell 16%, resulting in a C$1 billion decrease in market capitalization.
A Lundin investor who purchased shares in the intervening period between the rockslide and the Disclosure sought leave to commence a secondary‑market claim under the Act, alleging the rockslide constituted a "material change" that was not disclosed forthwith as required by the Act. In Canada, a plaintiff must have leave to pursue a claim under the Act, meaning that there must be a "reasonable possibility" that the action will be resolved in favour of the plaintiff at trial.
At first instance, the Superior Court refused leave, holding there was no reasonable possibility of the plaintiff proving the rockslide constituted a "material change" because none of the instability of the pit wall, the landslide, or the alteration in the mine's projected output resulted in a shift in the issuer's core aspects that put it in a different position or on a different course.The Court of Appeal reversed the motion judge's decision, granting leave and finding a reasonable possibility that the developments at the mine constituted a "material change" to operations by altering mine's production forecasts and ore quality mix.
The SCC decision
In reasons delivered by Justice Jamal for the majority, the Court dismissed the appeal, concluding that there was a reasonable possibility that the respondent could succeed at trial in showing that the events occurring at the mine constituted a "material change" that Lundin should have disclosed forthwith.
The decision confirmed that "material change" under the Act refers broadly to any change in an issuer's business, operations or capital that, if material, must be disclosed forthwith—not just "core" or "high-level" shifts. The SCC emphasized that "change" should not be restricted by qualifiers like "important" or "substantial" and that the statutory distinction between a "material fact" (which under the Act is required to be periodically disclosed) turns on whether the development is internal to the issuer and dynamic over time.
(a) The majority view on "material change"
All members of the Court were aligned that "material change" and "material fact" are distinct concepts creating two distinct continuous disclosure obligations. While, under the Act an issuer must make periodic disclosure of a "material fact" at regular reporting intervals, every "material change" must be disclosed forthwith. The Court was also aligned that the Act defines a "material fact" more broadly than a "material change." While a "material change" must be with respect to an issuer's "business, capital or operations," any fact can be a "material fact" where it meets the test for materiality.Finally, the Court was aligned that a "material change" must be internal to the issuer and reflect a qualitative alteration in its "business, operations, or capital" between two points in time, whereas a "material fact" can be any fact that would reasonably be expected to have a significant effect on market price or value, including external developments.
The majority and dissent diverged significantly on whether the broader and more purposive approach to identifying a "change" cited by the Court of Appeal, or the more specified interpretation of a "change" relied on by the motion judge, was correct. The majority found that the motion judge erred in his over reliance on a dictionary definition of "change" and incorrectly imported considerations of magnitude or significance into the determination of whether a "change" had occurred.
The majority confirmed that the determination of whether there has been a "material change" is a two-step inquiry. The first step asks whether the issuer's "business, operations, or capital" qualitatively changed in an internal sense. The second step asks whether that change would reasonably be expected to have a significant effect on the market price or value of the security from the perspective of the reasonable investor.In the opinion of the majority, the intent of the legislators in not expressly defining "change" and "business, operations or capital" within the Act meant that the meaning of "change" "should not be constrained by dictionary definitions." The majority rejected the decision of first instance that focused on "change" as being connected to the core aspects of the issuer, holding that the Court of Appeal was correct to say that: "a change is a change."
In this vein, the majority held that a "change" is not required to be "important or substantial." A change's magnitude is assessed at the separate, materiality stage, which asks whether the change would reasonably be expected to have a significant effect on the market price or value of the issuer's security.
The majority adopted the same broad, flexible approach to its interpretation of the words "business, operations or capital." The motion judge defined the "business" of an issuer as what it does to generate revenues; "operations" as how or where the company conducts business; and "capital" as the company's share structure and rights of shareholders. Rejecting this approach, the majority reasoned that these terms were intentionally left undefined by the drafters of the Act to allow for the remedial nature of the legislation and application to a broad range of industries and financial structures. The Court held that they are to be used as holistic standard for assessing corporate developments and that restricting the generality of these terms would "ossify" the Act, undermining the purpose of continuous disclosure obligations.
(b) The dissent's approach to a "material change"
While the dissenting opinion will obviously not govern, Justice Côté made a number of critical points that will undoubtedly factor into the analysis performed by issuers and ultimately the courts in any ensuing litigation. Key among them was Justice Côté's concern that too broad a definition of "material change" would collapse the distinction between "material change" and "material fact" and would disrupt the intentional legislative compromise represented by the periodic versus forthwith disclosure requirements. This compromise is not given effect if mere developments to an issuer's affairs qualified as "material changes." Justice Côté added that excessive disclosure caused by a conflation of "material facts" and "material changes" carries real risk to the integrity of the capital markets and its participants. On this point, Justice Côté raised a concern about whether over-disclosure and premature disclosure may frustrate the efficient allocation of capital, and whether a broad interpretation of "material change" raises the risk profile for directors and officers and increases the likelihood of litigation.
(c) Standard for leave
There was agreement between the majority and the dissent regarding the standard to obtain leave under the Act. A merits-based screening must occur at the time leave is sought and the applicant must show there is "a reasonable or realistic chance the action will succeed." This requires both a plausible application of the correct legal standard to the facts and some credible supporting evidence.
The majority and the dissent also agreed the exercise of statutory interpretation should not be conducted less stringently on a motion for leave. Rather, it is the evidentiary standard that is relaxed. The plaintiff must show a "a plausible application of the relevant legislative provisions, based on the limited evidence available at this early stage of the proceedings."
Impact of the Lundin decision
For issuers who hoped the decision would provide concrete guidance as to what constitutes a "material change," they are unlikely to be satisfied. The decision simultaneously widens the scope of what may constitute a "material change" while providing little direction as to what events meet the standard. For investors, the decision is likely to be welcomed as an "investor-friendly" interpretation of "material change" that will likely lead issuers to err on the side of disclosing new developments more frequently.
What remains to be seen is the impact on Canadian capital markets and whether these elevated disclosure obligations in connection with "material changes" will impact insurance availability and willingness of directors and officers to participate with Canadian issuers, as the dissent suggests, or whether it will optimize informational balance in the markets, protecting investors and elevating the quality of their investment decisions, as anticipated by the majority.
Footnote
1 Note however that the Toronto Stock Exchange's Timely Disclosure Policy requires both "material changes" and "material facts" to be disclosed forthwith.
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